Which Law Applies: State or Federal?

Generally, the Federal Arbitration Act (FAA) (9 U.S.C. § 1) applies to any arbitration clause in a written contract that in-fact involves interstate commerce. Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265 (1995); Eastern Funding, L.L.C. v. Roman, 882 So. 2d 1059 (Fla. 4th DCA 2004) (Florida courts must enforce arbitration agreements that are subject to the FAA); see also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967);Merrill, Lynch, Pierce, Fenner & Smith Inc. v. Melamed, 405 So. 2d 790 (Fla. 4th DCA 1981); Trojan Horse, Inc. v. Lakeside Games, 526 So. 2d 194 (Fla. 3d DCA 1988); United Services General Life Co. v. Bauer, 568 So. 2d 1321 (Fla. 2d DCA 1990). The FAA preempts any state law and state courts cannot apply state statutes that invalidate arbitration agreements. Id. This application is true regardless of whether the parties intended or contemplated the preemption. Id.

Interestingly, according to Volt Info. Scis., v. Bd. of Trustees of the Leland Stanford Junior Univ., 489 U.S. 468 (1989), the FAA does not preempt state law where the parties agreed in contract to a choice-of-law provision. The court reasoned that when an arbitration agreement contains a choice-of-law provision, that provision must be honored and a court interpreting the agreement must follow the laws of the jurisdiction selected by the parties. In essence, the court held that when a choice-of-law provision is included, that the provision dictates whether state or federal arbitration rules are applied. Notably, this opinion has been highly criticized over the application of the choice-of-law provision and the United States Supreme Court has even tried to distinguish Volt. See Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995) (holding that an arbitration award of punitive damages that is otherwise permitted by law cannot be impeded by a choice-of-law provision). Other courts have refrained from the Volt application under the general principal that choice-of-law provision determines which state law is applicable, not which arbitration rules were applicable. The dissent in Volt, penned by Justice Brennan and joined by Justice Marshall, clearly articulated this argument stating that the FAA requires courts to enforce arbitration agreements in contracts involving interstate commerce and that choice-of-law clauses have never been used to define the relationship between state and federal law. The dissent further compared a choice of law provision to that of a car crash in a specific state but insurance policy from a different state. The dissent noted that applying the majority’s opinion to the car crash scenario would serve to nullify the FAA and that the “laws of the jurisdiction” also includes federal law. Id.at 491.

Importantly, specific carve outs exist in reference to the aforementioned general rules. A federal court has jurisdiction under §4 of the FAA when the federal court would have subject matter jurisdiction over the action, save for the arbitration agreement. Vaden v. Discover Bank, 556 U.S. 49 (2009). When this issue arises, the federal court should look through the §4 petition to the underlying controversy between the parties to determine whether it has jurisdiction to grant the relief requested. Id.Moreover, §1 of the FAA excludes from the FAA’s scope the contracts of employment for seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. While this provision reads broadly, the court in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), limited the application only to transportation workers. The provision does not alleviate all employment contracts from arbitration. Recently, the Court in New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019), expanded on the definition of “contracts of employment” stating that contracts involving commerce or maritime transactions that create an independent-contractor relationship are also included in the exclusion.

In essence, the determination of which law applies is circumstance specific and requires an analysis of the contract at issue and a determination as to whether interstate commerce is involved.

Should you have questions related to the content of this article, please contact Victoria Pearce at vpearce@bbdglaw.com.